Gloom merchants who have predicted that the economic picture in law firms will brighten only slightly, if at all, in the short term are stoutly contradicted in a new report which is frankly optimistic for the future.A comprehensive study of medium to large law firms shows that both recruitment levels and profit margins are expected to rise over the next few years.

Conducted by researchers at the London Business School, the survey looked at past performances and future intentions of nearly 150 London and regional firms.Slightly more than 40% of those firms were based in the capital and firms were divided into three categories: 10-19 partners, 20-39 partners and more than 40 partners.Another survey carried out by accountants KPMG Peat Marwick predicts that good times lie ahead for litigation specialist lawyers.

Its report claims that three-quarters of the firms surveyed 'expect a continuing boom in litigation' over the next five years.Contrary to the accepted wisdom, the London Business School researchers predict that employment patterns across the board at law firms will move upwards.

The research also goes some way towards debunking the view that law firms will move towards employing more paralegals to fill jobs historically done by qualified solicitors.Say the report's authors: 'Predictions that paralegals or support staff will replace qualified staff seem premature.' Indeed, their results show that more than 65% of firms said they expected to take on more equity partners by the end of 1995, while nearly 46% said they would have more salaried partners.Of those firms expecting to take on more equity partners, 31% predicted they would recruit from the external labour market.

And of the firms expecting to hire more salaried partners, 83% said they would hire from outside.The picture appears even more buoyant for other fee- earners and non-qualified staff.

An astonishing 83% of firms said they would be employing more fee-earners and another 51% said they would take on more full-time administrative staff.Analysis of firm profitability was more difficult for the researchers - the result of lawyers' traditional reluctance to discuss the subject.

Some 20% of firms participating in the survey refused to respond at all to questions regarding profit.Those who did respond indicated that the recession might not have had such dire consequences as initially thought.

Some 43% of firms said their profits were greater in 1992 compared with 1989.

Only 37% said their 1992 profits were lower than three years before.The report also shows an entrenched philosophy of sticking to traditional methods of measuring profits.

Nearly three-quarters of firms evalua ted at the departmental level, while only 6% measured the profitability of individual clients.

Indeed, only about a quarter of firms measure profit at partner level.When it comes to dishing out the profits, most firms also opt for tradition.

The researchers say that despite popular speculation to the contrary, the 'lockstep' system of linking partner profit sharing to time served in the partnership is still the norm.According to the results, 60% of firms still operate the lockstep, while about a quarter dole out equal shares to partners.

Only 2% of firms allocate profits on the basis of fees earned.Other measures of law firm performance have improved substantially over the last few years.

According to the report, more than half the sample had instituted some form of budgetary system and business plan.Another 40% had adopted one of several quality standards and about one-third of the firms had introduced methods of assessing client feedback.Ironically, however, client relations came bottom of the pile when firms allocated money to training programmes.

Most training budgets were spent on courses designed to improve 'technical/professional knowledge' followed by management skills and marketing.Indeed, the researchers were also baffled by the amount of training money spent on management techniques when most firms rated as relatively low that skill when promoting staff or assessing partners.Formal appraisal was found to be most frequently used for assistant solicitors, with 82% of firms claiming to have a system.

About 62% of firms said they also had formal appraisals for support and administrative staff, but only 37% had a similar systems for equity partners.That last figure was contrasted by the researchers with the accountancy profession where nearly two-thirds of firms hold formal appraisals of their partners.In general strategic terms, the researchers criticise law firms for devoting too much planning time to recruitment and training and development instead of studying promotion schemes and appraisal systems.Such an approach is potentially dangerous, say the authors, 'given the importance of good quality labour in these knowledge-intensive firms and the importance of promotion as an incentive.

Human resource policies, on the whole, do not seem to be closely linked to business planning.'According to the KMPG survey - which covered 105 leading litigation solicitors - 78% of respondents said they expected the litigation field to continue growing until nearly the end of the century.

Over the past five years, the market has already grown by 80%.During that time, according to the research, the strongest growth has occurred in the Midlands, followed by firms in the north west.

For the future, however, it is the firms in the north east which are the most optimistic, predicting an average of 50% growth.The areas where most growth is expected are general commercial work, insolvency, personal injury, professional negligence and insurance.According to the survey, the roots of the increasing litigation work are found in an ever more litigious society, an increasingly complex commercial world and the economic recession.

Also, about a quarter of firms claimed that marketing projects had accounted for growth.